New algorithms for optimal reduction of technical risks

Abstract

The article features exact algorithms for reduction of technical risk by (1) optimal allocation of resources in the case where the total potential loss from several sources of risk is a sum of the potential losses from the individual sources; (2) optimal allocation of resources to achieve a maximum reduction of system failure; and (3) making an optimal choice among competing risky prospects. The article demonstrates that the number of activities in a risky prospect is a key consideration in selecting the risky prospect. As a result, the maximum expected profit criterion, widely used for making risk decisions, is fundamentally flawed, because it does not consider the impact of the number of risk-reward activities in the risky prospects. A popular view, that if a single risk-reward bet with positive expected profit is unacceptable then a sequence of such identical risk-reward bets is also unacceptable, has been analysed and proved incorrect.

Keywords:

• risk reduction
• risk-reward bets
• maximum expected profit